Posted: 6:37 p.m. Monday, March 18, 2013
By Brian O'Connell
NEW YORK (MainStreet) — It is said that the ancient Greeks had a knack of wrapping truths in myths, the better to communicate everyday truths.
An interesting concept, but one that won’t wash with our investment experts, who were invited to pick their biggest retirement planning myth and debunk it, whether it be how much money you’ll really need to retire comfortably or the virtues of paying off your mortgage early.
The ancient Greeks wouldn’t approve, but they’re not around to help you with your retirement anyway.
Here’s a look:
Myth No. 1: $1 million will guarantee a stable retirement.
Expert: Nicole Rutledge Regili, lead adviser with Orlando, Fla.‘s Resource Consulting Group
First, $1 million today does not buy you what $1 million would buy you 20 years ago, thanks to inflation. Second, $1 million may or may not be your “number.”
That number is determined by many variables, but spending and portfolio returns are the most prominent.
Here’s what I mean: Someone earning about 7 percent annualized for 20 years and spending $200,000 per year would need around $2.2 million in the bank, whereas someone earning this same 7 percent but spending only $100,000 per year needs only half as much, $1.1 million. There’s a similar relationship with the rate of return your money is earning. If your portfolio is invested very conservatively and earns 4 percent per year, and you want to spend $200,000 per year, you would need closer to $3 million.
Myth No. 2: Health care is your biggest expense in retirement
Expert: Chris DeGrace, vice president, SunTrust Investment Services
Health care certainly is a big cost, but the No. 1 expense is actually taxes.
Because many people are drawing on assets that have enjoyed tax deferral during their working years, they are forced to pull money out of those accounts at ordinary income rates. It’s very important to determine a strategy that enables you to draw down retirement income across all accounts available in the most tax efficient way. Ideally you want to let the tax-deferred accounts grow as long as possible. In addition, one would want to focus on the basis of the taxable assets to decide what funds to spend.
Myth No. 3: Downsizing in retirement will save you money
Expert: Caroline Delaney, executive vice president at San Jose, Calif.’s Hillis Financial Services
Many clients want to downsize, but their egos tend to get in the way. They think moving into a smaller home will cut back on their monthly outlay, but that tends not to be the case. They may move into a smaller home, yet the money they save in mortgage payments ends up going to remodeling the home or a new car payment. When giving up the space, make sure you are actually reaping the benefits.
When downsizing, many retirees also consider relocating to states that have lower taxes. This should not be the main consideration when looking to downsize and relocate. State taxation rates are always subject to change, especially in light of the financial difficulties many face.
Myth No. 4: You should pay off your home mortgage early
Expert: CPA, financial planner for Mackey McNeil and president of Bellevue, Ky.’s Mackey Advisors
It really depends.
If one makes additional principal payments to pay off the mortgage early, that is different from someone who takes $100,000 out of their portfolio and pays off the mortgage in one big chunk. It’s best to run the numbers for yourself and see what is best for you. Too often, taking a lump sum at retirement to reduce debt creates a very bad result. At a 40 percent tax rate, you have to take about $160,000 out of your portfolio to retire $100,000 in debt. This means that entire $160,000 is not earning money for you for the rest of your life.
In addition, today’s mortgage interest rates are at an all-time historical low. Given that mortgage interest continues to be tax deductible (assuming one itemizes), the equivalent interest rate is lower still. One could refinance an existing mortgage (even consider a cash-out refinance) and either invest the rest in a balanced portfolio that would allow for current income and growth of capital at a rate greater than the mortgage interest rate and/or pay off high interest credit card debt.
Myth No. 5: Medicaid covers all of your health care expense
Expert: John Bucsek, managing director of MetLife Solutions Group in Cranford, N.J.
Medicaid covers only catastrophic illness, not all of your health costs — that’s why they have Medigap and other supplemental coverages for an additional cost.